Tell me about it!

A plumber with an interest in how things work survived the tech crash to come back with an internet product that is changing the telecommunications industry. By KRISTEN LE MESURIER

By Kristen Le Mesurier

Blink and you would have missed the rapid rise of Freshtel. In just four years, founder Michael Carew has developed a hardware and software package for voice over internet protocol (VoIP), listed his start-up company on the Australian Stock Exchange, and signed up Tesco, one of the world’s biggest retailers, as a buyer and investor.

Freshtel is selling technology that threatens the revenue stream of every player in the industry. It sells handsets and software to retailers at wholesale prices.

Tesco markets the packages under the Tesco Telecommunications brand while all other retailers — Argos, Woolworths and British online shopping site QVC — sell the packages under the brand that Freshtel outsources its manufacturing to, Binatone.

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Freshtel receives a per-customer licence fee for its software, a margin on the hardware, and on-going service fees from customers that use Freshtel’s Voicedot network.

Tesco is a big believer in the Australian start-up. The retailer increased its stake in the ASX-listed stock for the second year in a row when it bought a further 6% of shares last November for $12.3 million.

Tesco, which reported sales of £37 billion in 2005 and has a 30.6% share of the British grocery market, holds a 12.34% stake in Freshtel.

Revenue has soared following the Tesco deal. Turnover increased by 600% in the six months to December to $2.4 million. The share price has risen steadily from its listing price of 20¢ in April 2005 to 70¢ on February 22, 2007.

The start-up story

When Carew picked up a basic internet phone five years ago he had no experience in telecommunications. He was a plumber who loved tinkering with new technology. “I’ve always invented things, but I’ve learned success is about having the right product at the right time,” he says.

While running a plumbing business, Carew invented the leaf-free Gutter Guard and a water conservation control device. He sold both, patents and all, because he never assumed that he had the skills to commercialise the technology and rake in the profits.

During the dot-com boom, Carew set up an online do-it-yourself hardware store, called tradestore.com, aimed at renovators. At its height, it stocked 30,000 products.

“I dropped a brochure in Jeff Kennett’s letterbox and Jeff called me, wanting to invest. So I partnered with him. But we could see the dot-com crash on the horizon so we kept operating organically and shut it down when the orders had trickled away,” Carew says.

At roughly the same time, Carew stumbled across a plastic internet phone from Taiwan. “I had the technical team from the website so I asked them to see whether they could develop internet telephony,” Carew says.

He kept his plumbing business operating until he was sure the technology worked. “We listed early because we weren’t going to get enough investment without giving most of the equity away. Listing gave us a global presence, credibility and the flexibility to raise more funds as we moved forward,” Carew says.

Partnering versus going it alone

One of the biggest challenges for VoIP providers remains acquiring customers. While VoIP has long been hailed the cheap alternative to fixed-line phone connections, the industry faces two barriers to growth.

First, the big telcos are fighting to retain customers by offering capped mobile and fixed-line phone plans. Second, few small businesses and consumers understand VoIP technology, which means that lots of money needs to be spent educating the market.

Freshtel tackled the second challenge by partnering with big retailers who have the marketing nous and the resources to reach the mass market. “All of the money in the bank couldn’t pay for the shelf space and advertising that Tesco creates,” Carew says.

It cost Freshtel just 14¢ to acquire each customer in the three months to September, with advertising totalling $9000. To put this into perspective, engin, an Australian VoIP retailer and provider, spent “substantially less than $100” acquiring each new customer in 2006, engin chief executive Ilkka Tales was reported as saying in June 2006.

Managing growth

With 50% of Carew’s time spent overseas, he faced a difficult decision – hand the reins over to an outsider or spend more time in Australia. “It was impossible to manage the day-to-day of the business from London. It was clear that I was good at working on our white labels [wholesaling] and building relationships with future partners, so I created a new position for myself: director of global business development,” Carew says.

Carew handed the chief executive role to an outsider in January and strengthened the management team at the same time. The former chief technology officer of Huawei Technology, John Butkiewicz, was appointed chief executive and the former managing director of Telecom Australia’s international division, Ken Loughnan, replaced Leslie Taylor as chairman.

Expansion plans

The latest capital injection from Tesco signals big ambition. Together with phone manufacturer Binatone, Freshtel is planning a much deeper push into Britain and Europe by expanding its product line and selling wholesale to other retailers as big as France’s Carrefour and America’s Wal-Mart.

“Binatone has a lot of major clients through those areas, so they’re a great partner for introductions. We are in discussions with companies in Europe. There are massive opportunities; the challenge is making sure we pick the right ones,” Carew says.

Closer to home, there are rumours that Freshtel is negotiating wholesale deals with big retail chains in Australia. Freshtel already sells to one of the biggest electrical buying group in Australia, Narta Group. “Australia is a focus and we will do [a deal] as soon as we can, but I can’t tell you much more than that,” Butkiewicz says.

For further opportunies and ideas on the Internet sector, see the Growth Resources section.

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